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Pundit’s Mailbag – Who Should Pay When Bananas Are The Focus Of A Store’s Promotional Effort?

Jim Prevor’s Perishable Pundit, September 27, 2011

Our piece, Memo to Supermarket CEOS, Don’t Kill The Goose That Lays The Golden Egg… Overpricing All Produce Items To Support Cheap Banana Prices Is A Distaster Waiting To Happen, brought several replies including this:

Supermarkets have been doing this forever.

Who do you think suffers when the produce department needs to make up for the higher shrink on the organic items?  The supermarkets raise the prices on the conventionally grown.

This has been a never-ending battle. Retailers always tell us growers that grocery works on 1-2% margins so they have to make it up in produce and shampoo.

Never ending story.

— Tom O’Brien
President
C&D Fruit and Vegetable
Bradenton, Florida

Tom is generous in sharing his views on industry issues, and we’ve been pleased to feature his comments in pieces such as these:

Pundit’s Mailbag — Kudos To Wegmans And An Industry Willing To Work Together

Pundit’s Mailbag — Retailers Should Pay For What They Say They Want

Pundit’s Mailbag — Flavor Consistency

Pundit’s Mailbag — Temperature Monitoring

Pundit’s Mailbag — Green Acres Is The Place To Be?!?

Perishable Thoughts —  Politics And Cynicism

Pundit’s Mailbag — No Matter What Growers, Shippers Or Retailers Do About Food Safety, ‘You Will Be Sued’

In this case, we actually think our point is a subtle one. We don’t have any particular objection to retail CEOs wanting to use particular items as flags to identify a low price image to consumers. In some stores, that flag may be chopped meat; in others, bread; and sometimes it may be bananas.

Our suggestion is related to how this promotional investment should be paid for. If a CEO decided to run a million-dollar TV campaign saying that “our store has the lowest prices,” everyone would think him out of his mind if he tells the senior produce executives to bill the cost of that ad to the produce department.

Yet if the CEO decides that, instead of taking a million dollar TV buy, he wants to take a million-dollar hit on banana margins, then if he doesn’t change departmental margin requirements or subsidize the promotion in some way, he is, in fact, charging the produce department for the cost of that overall store promotion.

Now, in the end, this is a choice the CEO gets to make. We received another letter speaking to that point:

Regardless of the industry, CEO's have a business macro view and department heads a micro view.

Never knew a department head that didn't question a different approach, but it is up to them to support their position and then if they fail to change the CEO's mind do their best to make the requested application work.

It's like the head football coach overriding one of the offensive or defensive coordinators. Some ideas work and some don't, but communications is a key. After all, it's a team effort. 

— David Diver
Formerly Vice President of Produce
Hannaford Brothers

Dave is 100% correct. The CEO has to make the choice. We were making the argument that the choice should not be to arbitrarily burden the department that happens to feature the item being promoted.

There are many ways to handle this. In some stores, the burden of being the big draw rotates, and produce may get the job just in the summer. That may work out fairly.

But if the decision is to take, year round, the biggest volume item in the produce department and make no money on it so as to persuade consumers to shop the overall store, we will stick to our guns and say that this is not a cost that should be borne by increasing margins on other produce items.

It is an overall store marketing expense and should be handled as such. CEOs should want to handle it that way because spreading the marketing cost across the store will result in less distortion of sales than if the whole cost is put on fresh produce items.

Many thanks to Tom and Dave for their thoughtful notes.

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